Price The Market Part 15
Glen is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Hi, my name is Glen Bradford and today I feel good about my idea to price the S&P500 that I made recently. Let 'er rip!
80. Yum! Brands (NYSE: YUM) makes a point in their last conference call that since 2004 the average stock price that they've bought shares back at is $30. I don't think that is so impressive. That's just dollar cost averaging. I do agree that cities in China are popping up, but do they have people in them? In China, you never know. It's really convenient because the company prices itself during the call. The valuation can be broken into three parts: $18-$20B in Asia, $12-$15B in Franchise fees, $4-$6B in company stores. The present market cap is $26B, and thus the company believes it is undervalued and their argument places the intrinsic value above $66 per share. And yet, to my surprise, I see no insider purchases in the last year. If that's how they truly felt, I'd like to see them put their own money where their mouth is. My target valuation: $45-$60. I'd recommend starting a short position at $66.
81. Hormel Foods Corp (NYSE: HRL) is fairly valued, but boy does its price jump all over the place within its reasonable valuation. My target: $25-$30 expects the same growth that they've had in the past on a forward basis. Based on their perfromance throughout the crisis, this seems like a reasonable bar to set for expectations. Hormel isn't expensive, but it isn't cheap. I could see this one getting expensive. All of the cards are there to send this skyrocketing to irrational prices. This could be a trader's dream.
82. General Mills (NYSE: GIS) had a conference call in the last year that concerned me. They were seeing their costs rise. What's crazy about this is that in this environment, General Mills has been able to increase their operating profits faster than their revenue. Maybe General Mills is the kid in the class that complains after their exams and gets the A's? Probably a good perception management strategy. Target: $38-$42. If I had to pick, I'd own Hormel instead of General Mills at present.
83. Heinz (NYSE: HNZ) is hitting the price ceiling that they put up in 2008. Target: $50-$60. I'd avoid owning it above $53. I think that's where I'd start selling out due to the concept of opportunity cost, whereby there are better opportunities elsewhere. During the crisis, the stock dropped roughly 40% while their fundamentals continued to perform fantastically for the most part. This is something worth averaging into if the European situation continues to deteriorate.
84. Dr. Pepper Snapple Group (NYSE: DPS) is relatively expensive considering their lack of growth. A company with no growth should be priced like a bond if you ask me. Target: $30-$40. Compare this to Coca-Cola (NYSE: KO). There's growth over at Coca-Cola and Coca-Cola is actually less expensive than Dr. Pepper Snapple. Choose Coke over Dr. Pepper. Then you have Pepsi (NYSE: PEP). Pepsi has grown their revenues like coke, but their net margins haven't been able to keep pace like Coke. Lining them all up I like Coke the most, Pepsi second most and Dr. Pepper last at the present prices.
Lastly, I wanted to update my most recent thoughts on the 'European Crisis.' I think that this crisis is not priced into the markets at present. It could easily drop stocks over 50% by way of a wave of sovereign defaults as they fall like dominos. Fact is, the way things are structured, this appears inevitable. I would argue that if everyone plays by the rules as they exist today, I guarantee that this will happen. Please note that people do not always play by the rules that they create. We tend to call these people cheaters. Politicians will always operate in their best interest. As such, these perpetual bailouts may indefinately postpone this crisis.
The net result of this is stock prices that don't reflect this crisis because they are pricing in perpetual backstops. Looking at company valuations thus far, they are not bubblicious at all, especially when you factor in that interest rates are at all time lows. Also, a resultant of these perpetual bailouts is higher volatility, which is also driven by a generation of investors that is now pulling out of equities, not putting in.
Volatility should not go unnoticed. I have incorporated it into my personal trading strategy to lower my risk and now I treat investing like a business that throws off daily profits (dividends / trading profits / whatever you call them). I recommend that you consider doing the same if you agree that the volatility out there is here to stay. Not taking advantage of an opportunity looking you in the face is simply suboptimal. Now that you know, choose wisely.
Glen Bradford has no positions in any of the companies mentioned.
